AAA-rated foreign securities may be treated as collateral

Deeptha Rajkumar

Collateral corner


Currently, only

domestic players have the flexibility of offering collaterals for meeting margin requirements

This move

would widen the FII base allowing for greater exposure through derivatives contracts

Mumbai, Oct. 10

Foreign institutional investors are likely to be allowed to offer `AAA' rated foreign sovereign securities as collateral to stock exchanges against their deals in the derivatives segments. If okayed by the RBI and SEBI, the measure could lift derivative trading in terms of liquidity and turnover, say market participants.

The proposal is currently being looked into by SEBI and RBI. The Union Budget had proposed that FIIs be permitted to submit appropriate collateral, in cash or otherwise, when trading in derivatives. Currently, only domestic players have the flexibility of offering collaterals, such as bank guarantee or shares or deposit receipt, in place of cash or along with cash, for meeting margin requirements.

Since then the proposal has turned cold. However a consensus on the issue will be arrived at shortly, said informed sources.

Greater exposure

The move will widen the FII base allowing for greater exposure through derivatives contracts. "It will bring in better price discovery and wider participation," said Mr Devesh Kumar, Head-Equities at ICICI Securities.

According to Mr Naresh Kothari, Head-Institutional Equities, Edelweiss, the move would result in arbitrage margins, between spot and derivatives, coming down. "This in turn would bring down the overall cost of carrying future positions," he added.

Marketmen are, however, awaiting further clarity on the issue.

"While there is no denying that it will enhance trading ability for institutional investors, it is essential to know what kind of securities will qualify," said Mr Nimish Shah, Managing Director, Fortune Financial Services Ltd.

Investment strategist Mr Gul Tekchandani said that the move would further add to liquidity with the FIIs.

Gross traded value by institutional investors in the derivative segment for August 2006, stood at Rs 88,388 crore, forming around 9.41 per cent of the total turnover in the F&O segment.

(This article was published in the Business Line print edition dated October 11, 2006)
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